Sometimes, discipline cuts both ways. It doesn’t always keep you out of trouble. In fact, there are times when it’s your worst enemy, even though it has (and will continue) to save your back. That’s my tale with Micron Technology, Inc. (NASDAQ:MU), as MU stock price stopped me out at the worst time.
After a strong uptrend all year — MU stock price is up 110% in 2017 — I got on board in July after a recent bounce off the 50-day moving average. There was also a strong support trend in place near this level. But a few days later, support gave way and by August I had to cut my losses and move on.
The decline was, of course, only temporary and within six weeks, the trade would have been back to break-even. But I wanted to limit myself to a certain loss if MU stock didn’t work out. After all, this stock has changed hands between $10 and $36 multiple times in just the past few years. I didn’t want to get caught holding that bag — even if it has strong fundamentals.
In the end, it’s history. Shares have gone from the low $30s (where I bought in mid-summer) to the upper-$40s now, a move of almost 50%. So what should investors do now if they’ve missed the boat, or like me, misplayed Micron?
MU Stock’s Solid Fundamentals
Micron operates in a boom-and-bust environment. When supply is low and demand is high for NAND and DRAM storage, this stock is an absolute stud. And that’s exactly what I continue to see in Micron Technology news.
It’s not only what management tells us, but it’s what others say too. Buyers like Cisco Systems, Inc. (NASDAQ:CSCO), Nutanix Inc (NASDAQ:NTNX), Hewlett Packard Enterprise Co (NYSE:HPE) and HP Inc (NYSE:HPQ) have told us they don’t foresee DRAM prices coming down any time soon. In fact, the high price of these products are weighing on their own margins.
We don’t get a bad vibe from Lam Research Corporation (NASDAQ:LRCX) or Applied Materials, Inc. (NASDAQ:AMAT) either. These companies make the equipment necessary to produce NAND and DRAM. As demand for smartphones and other electronic devices that require memory continue to go higher, the increase in demand is added right to Micron’s pipeline.
Keeping supplies tight is the key, as it gives Micron pricing power. With pricing power comes higher margins and an inflated bottom line. But keep in mind, this run does not last forever. Something will inevitably go wrong. Micron may boost production to keep up with demand, adding too much supply and thus causing gross margins to slip.
It doesn’t have to be Micron’s error, either. Samsung Electronic (OTCMKTS:SSNLF) is a competitor and if it feels it can make more money, Samsung might be the one to overproduce. There’s also Apple Inc. (NASDAQ:AAPL), which with Bain Capital bought Toshiba Corp’s (OTCMKTS:TOSBF) chip unit for some $18 billion. This allows Apple to have more sway over its input costs, but it could also use the unit to leverage storage prices lower, given how quickly the costs can add up when it’s producing tens of millions of iPhones.
The Right Time To Buy MU Stock
Micron’s business is great. It’s just a volatile one that investors don’t want to get caught up in too late. Those who buy too late and try to ride through the storm will get burned the most. And that’s why so many Micron investors seem to have one foot out the door. On the first whiff of lower demand, higher supply or weakening pricing power, this stock can have a violent downturn.
If investors buy low, they have the opportunity to ride Micron for long stretches, often doubling or tripling their investment.
So what do we do now? For a brand new position, I think it’s too late. Let’s at least wait for a pullback. Right now, analysts expect earnings of $7.72 per share in 2018, up a whopping 55% from 2017. Notably, they currently expect an 11% decrease in 2019. Sales growth should increase another 22% this year and are currently forecast to be flat in 2019. Management estimates that DRAM demand will be steady in 2018, so that’s comforting too.
MU stock price trades with a trailing price-to-earnings (P/E) ratio of 10.5 and a forward P/E ratio of 6.75. That’s a buy, buy, buy! Right? It is — provided the supply/demand dynamic does not suffer an unfavorable shift. Color me skeptical, but it’s an important concern to keep in mind.
When it comes to trading the stock, I would wait for a pullback to $42. This served as a prior breakout point and prior resistance should act as support. Further, the 50-day moving average should act as support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
